DO NOT install Windows 7 SP1 using WSUS until Microsoft figures out where it is going wrong!
In my opinion, save yourself the pain and agony so many of us have gone through, and do not install Windows 7 SP1 via WSUS until Microsoft figures out what is causing it to hang on deployments. At this point, I would not recommend installing it from anything but a DVD or ISO of the full Service Pack. That has been successful for me; if the machine wasn't already messed up by a WSUS deployment attempt of SP1, in which case it still fails.
See the following posts for the pain. And the word from Microsoft is to not modify your pending.xml. You may cause yourself more harm down the road if you do.
Error 0xC0000034 during Service Pack 1 installations for Windows 7 and Windows 2008 R2
Windows 7 Ultimate SP1 installation fails with error code c0000034
Why you don’t want to edit your pending.xml to resolve 0xC0000034 issues
If you are seeing a Fatal error C0000034